Home loan tax reliefs often missed by taxpayers

Many of you who already own a second house or looking to buy a new house might give a look at the rules listed here to receive the often missed benefits.Preeti Motiani | ET Online | May 11, 2017, 16:00 IST

The Union budget of 2017 brought mixed bundle of joy for the taxpayers. While the section 80EE was re-introduced, holding period was lowered which brought cheers for the taxpayers, on the other hand, the individuals claiming a loss on the let out property or deemed to be let out property were left in shock.

Many of you who already own a second house or looking to buy a new house might give a look at the rules listed below to receive the often missed benefits.

1. You can claim tax benefit on interest paid even if you missed an EMI.Section 24 of the I-T act mentions the word interest payment "payable" on housing loan. It means that even if you have missed the EMI payment in a year you can still claim the tax benefit on it. It can be claimed as a deduction so long as the interest liability is there.

Kuldip Kumar, Partner and Leader - Personal Tax, PWC says, "One should retain the copy of the interest certificate issued by the lender i.e. bank or NBFC specifying the amount of loan, interest due etc. as this will help in case of any questioning from the tax department."

The principal repayment deduction under Section 80C, however, is available only on actual repayments.

2. Principal repayment tax benefit is reversed if you sell before 5 years.While the finance minister may have provided a relief by reducing the holding period to 24 months to qualify for the long-term capital gains but if you sell a house within five years from the date of purchase, or, five years from the date of taking the home loan, the tax benefit gets reversed.

"The deduction claimed will be added back to the income of the taxpayer in the year in which the property is sold," says Archit Gupta, founder, Cleartax.com

However, the loan amortisation calculations are such that the repayment schedule has lower component of principal repayment in the initial years of the home loan and the tax reversal rule only applies to Section 80C. Also, the benefit of lowered holding period for capital gains will apply from April 1, 2018, AY only.

3. You are eligible for tax break only when you are a co-borrower and co-owner.You cannot claim a tax break on a home loan even if you may be the one who is paying the EMI. For instance, there may be a situation when you're paying the EMI of a home loan for the property which is owned by your parents or spouse.

"However, when the house is in the joint name and funded by both the spouses by a way of housing loan, both husband and wife can avail the separate deduction for the interest payments and principal repayment of such loan," says Kumar.

Even if you own a property with your spouse, you can't claim deductions if your name's not on the loan book as a co-borrower.

4. You can claim pre-construction period interest for up to 5 years.Any interest paid on the borrowing during the construction of a house is eligible for tax relief only after you have received the completion certificate.

"Interest paid during the construction period can be claimed as a tax deduction in five equal instalments starting from the year in which construction of the property is completed. The total tax benefit will be annual interest payable + 1/5th of the pre-construction period "says Gupta.

While filing returns for the AY 2017-18, the maximum limit for the self-occupied property is Rs 2 lakh. In the case of let out property, there is no limit.

The union budget 2017 has removed this anomaly and put the cap of Rs 2 lakh on the let out property. The same will be effective while filing the returns for next year i.e. 2018-19.

5. Re-introduction of the Section 80EETo provide an additional relief to the homebuyers, the section 80EE has been reintroduced with effect from April 1, 2017. The maximum deduction available has been reduced from earlier of Rs 1 lakh to Rs 50,000 now.

However, this deduction comes with certain restrictions which need to be satisfied while availing this deduction. The conditions are:a) The home-owner/s should be first time buyer even if the property is bought in the joint ownership,b) The loan value must not exceed Rs 35 lakh and property value should not exceed Rs 50 lakh, andc) The loan must be sanctioned by a financial institution during the period April 1st, 2016 to March 31st, 2017.

Archit Gupta, Founder & CEO, Cleartax.com says, "If the taxpayers are able to meet conditions for both of section 24 and 80EE, their taxable income can be reduced by 2.5 lakhs in FY 2016-17 return filing."

6. Processing fee and other charges are tax deductible.Most taxpayers are unaware that charges related to their loans such as processing fees or prepayment charges qualify for tax deduction. As per law, these charges are considered as interest and therefore deduction on the same can be claimed.

"Section 2(28A) of I-T Act defines interest as interest payable which includes any service fees and other charges in any manner in respect of money borrowed," says Kumar.

Therefore, it is eligible for deduction under Section 24 against income from house property. Other charges also come under this category but penal charges do not.

Also, any payment made towards stamp duty and registration fees incurred by the individual are also tax deductible as per the section 80C(2) (xviii) (d) of the act.

7. Loans from relatives, friends and employer are eligible for tax deduction.If you have taken a loan from friends and/or relatives to acquire a house then you can claim a deduction under Section 24 for interest repayment on loans. You can also claim a deduction for money borrowed from individuals for reconstruction and repairs of property.

"A taxpayer would need to obtain a certificate from the relative which would contain the details such as the amount of interest payable, amount of loan taken, specifying the property details for which loan is taken," says Kumar.

However, one must remember that this rule is only applicable for interest repayment. You cannot avail the tax benefits available on the principal repayment on that part of the loan borrowed from your relatives, friends and employer.

Further, a lender, in this case, your relatives and friends must disclose the interest earned on such transaction while filing their income tax returns.

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The unused Input Tax Credit (ITC) on goods and services lying with the property developers as on March 31 will be reversed for under-construction properties since the ITC stands to lapse from April 1 for such houses.